Definition
New Keynesian Economics is a school of thought in macroeconomics that builds on the principles established by classical Keynesian economics, primarily emphasizing the concept of “sticky” prices and wages. New Keynesians believe that prices and wages do not adjust quickly to changes in supply and demand, which can result in involuntary unemployment and reduce the effectiveness of monetary policy.
New Keynesian vs Classical Keynesian Economics Comparison
| Feature | New Keynesian Economics | Classical Keynesian Economics |
|---|---|---|
| Price Adjustment Speed | Prices and wages are “sticky” and adjust slowly | Prices and wages are flexible and adjust rapidly |
| Unemployment | Can result in involuntary unemployment due to rigidities | Focuses on demand-driven unemployment |
| Role of Monetary Policy | Monetary policy significantly impacts the economy | Emphasizes fiscal policy over monetary policy |
| Grounding | Incorporates microeconomic foundations for macroeconomic principles | More focus on aggregate demand without strict micro foundations |
Examples and Related Terms
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Sticky Prices: The idea that prices do not change easily in response to market trends, leading to inefficiencies in the economy. Think of it like trying to convince your pet cat to move when it is comfortably napping—good luck with that!
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Involuntary Unemployment: Unemployment resulting from the economy not having enough jobs available at the prevailing wage rate, partially a consequence of wage stickiness.
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Monetary Policy: Actions taken by a central bank to manage the economy by controlling the money supply and interest rates, sometimes akin to a dog trying to control a bunch of overly excited squirrels.
Humor and Fun Facts
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Quote: “Economists are like air-conditioning technicians: They make your life cooler, but you might not be thrilled about how complicated the setup is.” — Unknown
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Fun Fact: The term “sticky prices” has made it into pop culture! Ever heard a teenager complaining about video game prices? You’d swear it refers to glue on their game controller!
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Historically, New Keynesianism became the go-to party planner for macroeconomics during the ’90s, and threw a big party right before the economic hangover in 2008!
graph TD;
A[New Keynesian Economics] --> B[Sticky Prices];
A --> C[Involuntary Unemployment];
A --> D[Monetary Policy Impact];
B --> E[Slow Price Adjustment];
C --> F[Labor Market Rigidities];
D --> G[Interest Rate Adjustments];
Frequently Asked Questions
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What was the main difference between New Keynesian Economics and Classical Keynesian Economics?
- New Keynesians believe in non-rapid adjustment of prices and wages (“stickiness”), while Classical Keynesians believe in more flexible prices and wages.
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What economic conditions does New Keynesian Economics address?
- It addresses conditions like involuntary unemployment and the prolonged impact of monetary policy on the economy.
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How did the financial crisis of 2008 influence perceptions of New Keynesian Economics?
- The crisis led to questions around the effectiveness of existing economic models, but New Keynesian principles remained integrated into modern macroeconomic policy discussions.
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Are New Keynesian ideas still relevant today?
- Absolutely! The foundational concepts of New Keynesian Economics are still very much part of macroeconomic policymaking and analysis.
References & Further Reading
- Books:
- Macroeconomics by N. Gregory Mankiw
- New Keynesian Economics and the output-inflation trade-off by David Romer
- Online Resources:
Take the Plunge: How Well Do You Know New Keynesian Economics? Quiz
Thank you for reading! No question is too sticky! Remember, stay curious, and keep smiling while you navigate the world of economics! 😊💰
